Should I buy an add-on business or grow organically?

Posted by James Price | JPAbusiness on 23-May-2018 02:00:00

Man and woman's hands on table with paperwork

We have had many people come to us over the years looking to move from an employed environment into their own business.

More commonly, however, our business-buying clients tend to be established business owners with successful businesses who are looking to grow further.

The choice for these clients is:

  • Do I grow organically?’ i.e. build on what they already have, or
  • Do I grow inorganically?’ i.e. buy a complementary business to ‘bolt on’.

It’s about evaluating the pros and cons of spending money upfront to purchase a business and network that someone else has already developed, versus keeping your money and spending the time and energy to develop it yourself.

What are the options?

Let’s use the example of a current client of ours. (I’m going to muddy the waters a little regarding their details so they can’t be identified, but their situation is a good illustration of this topic.)

Our client operates in the office products, accessories and fit-out sector in Queensland, producing a range of products used in large-scale corporate office environments. 

They have a very strong client base in Brisbane and south-east Queensland, but very few clients in NSW. We have been working with them to evaluate their options for expanding into NSW, particularly the Sydney metropolitan area.

Some of their options include:

  • Inorganic growth:
    • buy a similar, established business in Sydney – or enter into a joint venture with a similar, established business in Sydney – to achieve visibility and get their products distributed in that market;
    • sign a distribution agreement with a Sydney company to distribute their products in that market, as a means of extending what they’re already doing in Brisbane across a broader geography;
  • Organic growth:
    • grow organically by employing a key person in Sydney as a business development project officer.

How to choose?calculator, pen

There are some interesting dynamics around that decision-making process and I would always suggest that people in this situation get robust, independent advice to pressure test their ideas.

Basically our client has to weigh up:

1) How much would it cost to buy a standalone business, or enter into a joint venture or distribution agreement with another business, and what are the risks of doing that?

Risks of these options may include: 

  • people and partner risk (dealing with another business culture and way of doing business)
  • different client servicing approach
  • brand and credibility not necessarily aligned to your values
  • how sustainable are the projected business maintainable earnings (BME) and, if they decline, how does this impact ROI and payback?

Versus...

2) What expertise do they have that would allow them to organically grow their market share, and what are the risks of doing that?

Risks of this option may include: 

  • lack of on-the-ground understanding and networks to develop business from scratch
  • cash flow burn if ramp-up from a business and financial perspective is slower than predicted
  • lack of internal capability and sufficient support structures to deliver entry and success in a ‘foreign’ market.

Back of blonde-haired woman

A different perspective

Now let’s look at another example, in a completely different industry.

Imagine you work in a business-to-business environment as a distributor of skincare products and you want to add on a new business line, distributing haircare products.

You typically deal with salons, beauty therapists and so on, and a lot of this existing client base would see value in the new products.

Would you go out and pay significant money for an add-on business with haircare product clients, or simply leverage your existing client base?

It seems a pretty simple question, doesn’t it? Of course you wouldn’t waste your money.

But wait!

What if you want to distribute a particular line of haircare products and the only way to do so is to buy a competitor who holds the distribution agreement for those products.

In that case you would have to potentially consider buying that business in order to secure the product.

Similarly, perhaps you and your client base are located in South Australia, but you want to expand your operations nationally.

In that case you might consider buying a business that covers Queensland, NSW and Victoria, because suddenly you have geographical expansion which may have been very hard to develop organically in a short space of time.

The impact of digital platformsOnline shopping-tablet and credit card

It’s important to consider the impact digital platforms could have on your growth plans.

As online sales, marketing and servicing have become more prevalent, it has become easier to establish a broader customer base beyond local markets.

For instance, when we first started our business in regional NSW, many of our clients were based within 100km of us because it was convenient for them to come and see us. That was over 16 years ago.

Our client base is now spread far and wide, both internationally and in all the eastern states of Australia. We didn’t buy a business to achieve that growth – and it has taken quite a while to develop – but online platforms have given us the means to drive it.

So, should I grow organically (build) or inorganically (buy)?

It depends.

Growing your own business is invariably about developing an idea or opportunity that you have control over now and wish to maintain control over.

If you look across the market you may notice one of the following:

  • the idea has not been commercialised yet;
  • the idea has been commercialised, but not in a form you’re happy with;
  • the idea has been commercialised in a form you’re happy with, but the cost of buying it upfront would not offer you a good return.

In those situations you would choose organic growth i.e. putting the resources into developing the opportunity within your existing business.

Alternatively, if you look at the market and see that the idea has been successfully commercialised and is priced in such a way that you could buy it and achieve a good return, it may make sense to ‘bolt it on’.

Whichever way you’re leaning, it’s important to have your ideas pressure tested with the help of an experienced, independent advisor. The JPAbusiness team can provide advice and ‘prove up’ your options – financially and strategically – if you would like support in this area. Contact us on 02 6360 0360 for a confidential, initial discussion.

 

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JPAbusiness offers a range of business transaction services to assist buyers and sellers, including:

  

JAMES PRICE | JPAbusinessJames Price has over 30 years' experience in providing strategic, commercial and financial advice to Australian and international business clients. James' blogs provide business advice for aspiring and current small to mid-sized business owners, operators and managers.

  

Topics: Buying a business, business advice, growing a business, growth strategies, organic growth, inorganic growth

 
Disclaimer: The information contained in this blog is general in nature and should not be taken as personal, professional advice. Readers should make their own inquiries and obtain independent, professional advice before making any decisions, taking any action or relying on any information in this blog. 
 
 

 

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